Put-Call Ratio

Every option contract outstanding has a writer on the other side of it. The put-call ratio counts how many puts are alive against how many calls, and reads the answer as a statement about what the sellers — the side with the obligation, the margin and usually the deeper pockets — are willing to be short of.

Which is why it is read backwards. A high PCR means writers are comfortable selling puts, so they do not expect a fall: bullish. A low PCR means writers are comfortable selling calls, so they do not expect a rise: bearish.

It is a sentiment gauge, and the workbook labels it plainly: the put-call ratio is generally treated as a contrarian indicator.

The ratio is computed two ways, and they are not the same number on the same day:

• On open interest — puts outstanding ÷ calls outstanding. The positional, slower reading.
• On traded volume — puts traded today ÷ calls traded today. The intraday, sentiment reading.

Open interest itself is read alongside the futures price, and Chapter 17 gives all four combinations:

One recent change matters. SEBI has moved open interest to a delta-adjusted, portfolio-level measure — Future Equivalent (FutEq) OI — computed as the net delta-adjusted open position across futures and options on an underlying. In the workbook's own worked table, a market-wide notional OI of 2,800 becomes a FutEq OI of 900 once each option position is multiplied by its delta. A long call of 500 contracts with a delta of 0.5 counts as 250, not 500. A PCR computed on the new basis is therefore not the same ratio as one computed on the old notional counts.

PCR (open interest) = Put open interest ÷ Call open interest
PCR (volume)        = Put volume traded  ÷ Call volume traded

FutEq OI = Σ (Position × Delta)        delta = ±1 for futures,
                                       0 to ±1 for options

An index options series shows put open interest of 8,000 contracts and call open interest of 12,000 contracts.

PCR = 8,000 ÷ 12,000 = 0.67

Below 1, so the reading is bearish: writers are half again as willing to be short calls as short puts.

Put money behind the ratio. At a contract size of 50 and a strike of 18,400, each contract carries 50 × 18,400 = Rs 9.20 lakh of notional:

Calls: 12,000 × Rs 9.20 lakh = Rs 1,104 crore
Puts :  8,000 × Rs 9.20 lakh = Rs   736 crore
                               ──────────────
Imbalance                      Rs   368 crore

Now notice what the arithmetic does: the lot size and the strike appear on both sides and cancel. PCR is a pure contract count. SEBI has raised derivative contract values so that a contract is worth not less than Rs 15 lakh at introduction, with lot sizes set so the value sits between Rs 15 lakh and Rs 20 lakh on review — a change that rewrites every rupee figure above and leaves 0.67 exactly where it was.

Now apply the delta adjustment. Suppose those calls carry an average delta of 0.4 and the puts −0.6:

Call FutEq OI = 12,000 × 0.4 = 4,800
Put  FutEq OI =  8,000 × 0.6 = 4,800
Delta-adjusted ratio = 1.00

The headline PCR says 0.67 and bearish; the delta-adjusted position says the two sides carry identical directional weight. Same contracts, opposite conclusions — which is the strongest argument there is for treating the PCR as one input and never as a signal on its own.

Chapter 17.5 (Interpreting open interest and put-call ratio for trading strategies) gives the 8,000/12,000 illustration, the contrarian reading and the four open-interest scenarios; Chapter 17.5.1 gives the FutEq OI table. Expect a straight computation, and more often a direction question — a PCR of 1.25 signals what? The workbook's answer is bullish, and candidates reasoning from the buyer's side get it backwards.

• It is a contrarian indicator. More puts outstanding does not mean more bearishness; the workbook reads it as bullish.
• Below 1 is bearish, above 1 is bullish. Almost every mark lost on this term is lost on the direction.
• Open-interest PCR and volume PCR are different numbers and can point opposite ways on the same day.
• Open interest is contracts outstanding, not contracts traded. Volume is the traded figure.
• Open interest is now delta-adjusted under SEBI's FutEq measure — the workbook's own example collapses a notional 2,800 to 900.
• PCR is sentiment, not valuation. Whether an option is dear is an implied-volatility question, not a PCR one.